Till 1973, most of the banks in Chile were owned by the government. During the tenure of military regime in Chile, the main aim of the regime was to modernize as well as liberalize the banking sector in Chile. The domestic capital market in Chile was very much suppressed. Credit had quantitative restraints imposed on them.
Importance of the process of liberalization:
Banking sector reform in Chile characterized by the process of liberalization commenced in the first half of 1974, when majority of the banks were sold to the private sector. Certain limitations, which were imposed on the banks were eased, interest rates were dislodged and several financial institutions were established.
Till the middle of 1979, international capital movements were under stringent supervision. As part of the banking sector reform in Chile, the government in the year 1979, took the decision of liberalizing capital account .
As a result of this, foreign capital entered Chile at an alarming rate and served as a breather for covering the country’s international debt.
Increase in the number of financial institutions:
Another important consequence of banking sector reform in Chile was that there was an increase in number of financial establishments in Chile. In the year 1981, number of national banks were 26; foreign banks were 19 in number; loan and savings organizations were 15 in number. This was in sharp contrast to the national banks, which were 18 in number and only one foreign bank, which was operational in the year 1973.
Liberalization of capital market:
There were three main hindrances, encountered by capital-market liberalization.
High rates of interest
Despite the increase in the number of financial institutions, savings were not enough as anticipated by the government in Chile. Ironically, savings, when the banking sector reform in Chile had already taken place was the lowest ever during 1974-1982.
Even though the number of financial establishments increased manifold, the authorities failed to judiciously govern the functioning of these institutions. As a result, majority of the banks and financial institutions provided loans to the people, all of them of which were not accountable. This led to the financial crisis,which occurred between 1983 to 1984.
However, in the year 1992, the authorities realized that for the banks and other financial institutions to function smoothly, supervision is essential. This paradigm shift of the monetary authorities transformed the banking sector in the country to a very stable and efficient system. Since then there has been no looking back for the Chilean government pertaining to the banking sector in Chile.
Last Updated on : 26th June 2013